On August 1, Dave King, CFA, Senior Research Analyst at ROTH Capital Partners, published a full recap report of Agenda Long Beach that includes sector views, specific company observations, and individual stock takeaways. See excerpts below:
Strong Buyer Attendance
This season’s Agenda Long Beach show was the biggest on record, with buyer attendance up roughly 40% from the January show. Although much of the increase in attendance can be attributed to positive sentiment towards Agenda itself relative to tradeshow peers, we cannot ignore the notion that action sports brands still strongly resonate with the retail community and consumers at large. The rise in attendance was especially notable for smaller retailers, a trend that may also be somewhat indicative of an improving economy. The street/ skate section of the floor was particularly crowded from start to finish—similar to other shows in recent years.
Mixed Levels of Fashion Innovation
After spending a great deal of time on the show floor over the course of two days, we were encouraged by the increasing number of contemporary/renaissance (hipster, eco-friendly, etc.) and women’s-focused offerings, but came away feeling somewhat uninspired by the levels of innovation in most larger brands’ Spring/Summer 2014 product lines. Not surprisingly, VF Corp’s Vans demonstrated a fair amount of fashion originality while still emphasizing its classic origins, but most other shoe manufacturers seemed to be following a “me-too” strategy versus Vans’ prior lines.
Category Still Growing
Although the category is maturing, it is still growing and sales continue to outpace broader teen retail. While some investors believe the industry is in decline, we would argue that much of the weakness is concentrated amongst smaller and/or more entrenched industry brands. Companies like Nike and VF Corp continue to gain market share by using “greater analytical rigor in the executive suite,” according to a recent series of anonymous interviews with industry executives conducted by Shop-Eat-Surf. Meanwhile, smaller and/or entrenched brands are often held back by the “insularity of the industry”, an unclear understanding of the competitive environment, decisions that are made based on relationships instead of business reasons, and a more reactive than proactive nature in identifying fashion trends. Along these lines, one trend we do worry about the one away from logos toward basics or more “hipster” fashions. While some industry—and particularly surf—brands have addressed this trend as evidenced by some of the new product we witnessed at this season’s and other recent Agenda shows, we worry that the trend also opens the door to competition from outside the industry.
Selective Stock Picks
In evaluating different action sports stocks, we see retailers like Zumiez and Tilly’s as the greatest beneficiaries of continued—albeit maturing—industry growth. Both offer a broad and unique product offering, and are more immune to product and brand cycles that naturally exist within the industry. Zumiez is positioned for significant growth online and internationally, while Tilly’s already has the infrastructure in place to support a much larger domestic footprint. Quiksilver is an attractive turnaround play given the potential for significant cost cuts over time, though we worry revenue pressures could persist near-term. Skullcandy and PacSun shares look cheap, but we remain at Neutral given limited visibility into success with ongoing turnarounds. PacSun shares have rallied significantly in recent months, and we believe its turnaround is predicated almost entirely on substantial sales gains and operating leverage —both of which have thus far generally eluded the company.
For further information or a full copy of the report, please contact Dave King.
